Serious Money:Winston Churchill famously quipped that "the farther backward you can look the farther forward you can see", writes Charlie Fell.

Alan Greenspan appears to agree, and recently told a group of economists in Washington DC that the recent behaviour in the world's capital markets was "identical in many respects to what we saw in 1998, what we saw in the stock market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly the bank panic of 1907".

The events surrounding the infamous "rich man's panic" a century ago and the lessons to be learned are particularly relevant for today's investors.

The seeds of the 1907 panic stemmed from the earthquake that shook San Francisco on the morning of April 18th, 1906. The earthquake measured 8.3 on the Richter scale and the fire that followed destroyed roughly 80 per cent of the city.

The damage amounted to $425 million, or 1.5 per cent of gross domestic product. British companies underwrote the majority of the city's fire insurance policies and within weeks millions of pounds worth of insurance claims were presented in London. The resulting capital outflows forced the Bank of England to take measures to defend the fixed sterling/dollar exchange rate and interest rates were subsequently increased from 3.5 per cent in September to 6 per cent the following month.

The US was enjoying unprecedented prosperity a century ago. Indeed, the economy had more than doubled over the previous decade. However, the dramatic growth brought an enormous demand for capital and the Bank of England's actions, which were accompanied by rate increases across Europe, slowed capital inflows to a trickle.

Not surprisingly, stock prices peaked during the spring of 1907 and the economy slid into a severe recession by summer.

Although the stock market moved lower in an orderly fashion over the summer, the shortage of liquidity, combined with reckless speculation over the previous three years, meant it was primed for panic.

The catalyst came on October 15th as a "corner" in the stock of United Copper collapsed (a corner sees an investor or group of investors build a large position in a stock in order to manipulate the price). The stock price dropped from $62 to $15 and within 24 hours F Augustus Heinze, the individual behind the corner, dropped $50 million and his financial empire began to unravel.

Heinze was deeply involved in banking and a "run" on the Mercantile National Bank, of which he was president, ensued.

Bank runs are attempts by depositors to simultaneously withdraw their deposits.

Heinze resigned and Mercantile survived. However, the run sparked an investigation into his intricate network of business interests and New York's Knickerbocker Trust Company came into focus.

A run began there on October 21st, which was aggravated by the National Bank of Commerce's announcement that it would no longer act as Knickerbocker's clearing agent. Panic developed and within a three-hour period the trust's tellers paid out more than $8 million to depositors before shutting its doors at noon.

Capital markets were in turmoil but there was no Federal Reserve to act as a lender of last resort. JP Morgan, the esteemed financier, stepped up to the plate and had his colleagues examine the books of Knickerbocker. Morgan's team were unimpressed by what they saw and much-needed liquidity was withheld. Morgan declared that he did not "care to assume the responsibilities of previous poor management".

The Knickerbocker Trust Company, which was located on the site that would soon become the home of the Empire State Building, never reopened.

Panic spread across the entire financial system, though the aging Morgan restored calm as he poured capital into the Trust Company of America and stood behind other ailing institutions. He provided monies to the New York Stock Exchange, which was struggling to settle daily accounts, and subsequently averted the bankruptcy of the city itself through the provision of a much-needed loan.

Needless to say, depositors and investors viewed Morgan as a saviour. The banking system remained intact while stock prices finally bottomed in November, almost 40 per cent below their apex in the spring.

The panic of 1907 carries important lessons for today's investors. The problems emanating from the earthquake quickly spread throughout the financial system, just as the subprime mess has today. A shortage of liquidity combined with the leverage arising from reckless speculation took its toll on confidence and panic ensued, just as today.

The liquidity crisis that has developed in short-term money markets, not to mention the events at Northern Rock, is eerily similar to the runs of a century ago, as too are the moral hazard issues arising from bail-outs. Morgan refused to rescue irresponsible lenders. Today's authorities should do likewise. Central bankers are taking the turmoil seriously at last and Fed chairman Ben Bernanke has stepped up to the plate with a half-percentage point cut in interest rates, though it remains to be seen whether he can restore confidence as JP Morgan did.